Apple, White Leaf show the pros and cons of outsourcing

SANTA CLARA -- At the end of a cul-de-sac in an industrial stretch near the freeway here, Andrew Le looks out over a concrete shop floor where he is pursuing an ambition that few in their right minds would tackle in 2012: manufacturing desktop computers in the heart of Silicon Valley.

Everybody knows that if you're going to manufacture computers or personal electronics, you do it the way Apple (AAPL) does: in Chinese factory compounds as big as cities with hundreds of thousands of workers turning out millions and millions of gadgets for consumers in the United States and around the world.

Everybody but Le knows that, anyway. His White Leaf USA has produced not millions, but 1,000 computers in the past year. His production crew of about 15 works on the colorful and smartly designed desktops in between machining precision parts for the semiconductor, medical device, aerospace and defense industries.

"That's kind of our main goal, to bring manufacturing and production back into the United States and into the valley," Le says. "Our goal is to show that it can work."

Bringing manufacturing back is an idea that carries tremendous currency these days. From water cooler conversations to chamber of commerce luncheons to the presidential debates, everyone seems to have a plan. Even Apple CEO Tim Cook hinted recently that the Cupertino giant is scheming to bring some production work back home. Of course, this being hyper-tight-lipped Apple, the company won't say exactly what Cook meant when he said he'd like to see Apple products made in the United States.

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"There are things we can do," Cook said in May at the D: All Things Digital Conference, "and that's what we are working on."

I'm not suggesting that Cook, 51, who apparently wants to increase domestic manufacturing, could learn something from Le, 23, who is manufacturing domestically. After all, Cook runs the most valuable company on the planet and Le's fledgling computer operation couldn't survive without support from the machining business that houses it. But the two companies -- White Leaf USA and Apple -- do provide a fascinating view into the revival of manufacturing in the Bay Area and the complex set of ingredients that make the region a logical place for some manufacturers, but not others.

That economic reality is the topic of this latest installment in a series of occasional columns looking at the surprising health and the budding resurgence of manufacturing in the Bay Area. Despite a struggling economy, the number of manufacturing jobs in Silicon Valley has grown in the past two years. Those production jobs tend to be in small operations, relying on automation and making early iterations of high-tech devices or producing highly specialized products.

Hai Hoang, left, and Hugo Garcia inspect a machined component at the White Leaf USA computers manufacturing plant in Santa Clara on Aug. 22, 2012. White Leaf builds computers right here in Silicon Valley as part of founder and CEO Andrew Le's vision of bringing jobs and manufacturing back to the United States. (Gary Reyes/ Staff)

Which gets us back to Apple and White Leaf. Apple makes a staggering number of the same product over and over again -- a model suited to factories filled with a low-wage and extremely flexible workforce surrounded by suppliers and other companies that have grown up over the years to support the production and transportation of its products. White Leaf produces a relatively few early-iteration computers with several hardware and software configurations -- a model suited to a small workforce on production lines close to designers and executives making the final decisions.

"Our argument is: Depending on how mature the production process is, or how modular your product is, if you have a very mature process and a very modular product, it's probably OK to ship that stuff off," says Harvard University business professor Willy Shih, who with colleague Gary Pisano just finished writing "Producing Prosperity: Why America Needs a Manufacturing Renaissance."

So, think of Apple as mature and modular. And think of White Leaf as not so much.

It's the reason Apple, other computer-makers, semiconductor manufacturers, component producers and companies making other popular consumer devices moved their production to Asia years ago. And it's a key reason why such large-scale manufacturers are not coming back to the Bay Area.

In the beginning, mass manufacturers left in pursuit of cheap labor. But today, with Chinese wages rising, the reasons that companies manufacture there are far more complicated. Apple, for instance, relies on hundreds of thousands of Chinese workers to build its products. Competitive demands and the pinpoint timing of major product launches mean that Apple wants those workers, or the companies employing them, to be able to ramp up at warp speed and turn on a dime.

"People go to China not because it's cheap, but because it's fast and flexible," says Andy Tsay, a Santa Clara University business professor who has studied Apple's supply chain. "Apple has been on the record saying they simply couldn't get that kind of responsiveness here. I come away with the idea that work/life balance is kind of an American concept or a Western concept."

The most sophisticated factory packed with robots is not nearly as flexible as a factory staffed by an army of humans, Tsay says. Humans can be temporarily idled, laid off, asked to do different tasks, work overtime. They can be awakened in the middle of the night to begin work on a redesigned process. And while robots can be pliable workers, they are a fixed cost -- a drag on the bottom line, whether they are working or not.

Le doesn't need a massive workforce. In fact, his desktop initiative grew out of the fact that the volatile nature of making parts for other companies means there are slow times when orders aren't coming fast enough to keep everyone busy. Le decided to look for a product his employees could make in the slow times, rather than cutting their hours or laying them off.

What he and his employees came up with was a line of desktop computers in black, blue and pink that are compact -- about 9 inches by 8 inches by 4 inches for the smallest model -- and retail for $420 to $1,500. No question the desktop market is crowded and hardly a hot spot for sales, but technology analyst Rob Enderle says a distinctive computer like White Leaf's might well appeal to consumers who want to stand out in a world of me-too tech gadgets.

"It's folks that like to have the status of something on their desks that kind of shows off their uniqueness. It's not something that everybody else has," he says.

Like every other PC-maker, Le would kill for Apple's profit-margin on its Macs, which analysts say is likely higher than 30 percent on the machines, which start at $999. But, he says, he's managed to achieve margins above 10 percent.

And Le has some pricing advantages that Apple doesn't enjoy. For one thing, White Leaf is privately held, and while Le aspires to be profitable, he is not subject to shareholder pressure for ever-increasing profits. He's also marketing a new product in something of a niche, given the size of the desktops he's turning out. He figures that allows him to set prices at $25 to $50 higher than comparable desktops, though he's prepared to make adjustments depending on consumer reaction.

Last year, Le found himself rather suddenly running White Leaf's parent company, AM&S Manufacturing. AM&S was founded in 2007 by his mother, Minh Do Le, who for years worked as an engineer in Silicon Valley. After doctors told Minh Do Le that her breast cancer had spread through her body, she asked her son to return from Paris, where he was studying international relations, to take over the business. Minh Do Le died at age 50 in July 2011.

"One of her biggest things was that she wanted to take care of her employees and she wanted to open up opportunities for people in the U.S., in an industry that she loved," Le says. "And so we wanted, or at least I wanted, to honor her, to continue that."

Le's U.S. manufacturing strategy has worked well for him so far. As I've written before, keeping manufacturing close to headquarters means companies can spot needed changes and make them quickly. Le says White Leaf has made seven modifications to its computers' chassis in the past year and that factory workers have made suggestions that have trimmed production costs.

"We believe anybody in our shop could come up with the next big idea," he says.

Apple, of course, is a different story. The advantages of proximity for the $500 billion company were eclipsed long ago by the efficiencies of enormous outside contractors. It was Cook, as Apple's chief operations officer, who presided over the company's move to hand off manufacturing to outside contractors, notably Foxconn, which supplies the world's iPods, iPhones and iPads.

"We decided over a decade ago that there were things that we could do better than anyone else and those things we wanted to do ourselves," Cook explained at the All Things Digital conference. Manufacturing, he added, was not one of those things. Cook is quick to point out that processors for the iPhone and the iPads are manufactured in Texas and that the gorilla glass for iPhones is made in a factory in Kentucky. But Tsay says any notion that Apple will start assembling iPods, iPhones and iPads in the United States is sheer fantasy.

"It would be a massive undertaking. Do we even have the capacity to ramp up something of that scale that quickly in the U.S.?" Tsay says. "Foxconn has hundreds of thousands of employees in their industrial park. That's like creating a small town overnight."

White Leaf's Le could only wish for such grand problems. Still, the young entrepreneur says the world hasn't seen anything yet from White Leaf. He sees a profitable company churning out 4,000 to 5,000 desktops a month -- preferably in Silicon Valley.

If Le's company were sitting anywhere else in the country, it might be hard to take his optimism seriously. But in Silicon Valley, the story of a young entrepreneur working to turn convention upside down by focusing on eye-catching computers, designed for high performance, has a familiar ring.

"I've always been interested in business models," Le says. "And one big business model, of course, is Apple and the idea of design. We can design the heck out of stuff."

And if geography is destiny, it should be noted that the gold-plated company that Tim Cook is now leading was launched in a bedroom at a young man's house about 10 miles away from the industrial park where Le stares out at his shop floor.

Contact Mike Cassidy at mcassidy@mercurynews.com or 408-920-5536. Follow him at Twitter.com/mikecassidy.